Notes
to Consolidated Financial Statements
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Marathon
Digital Holdings, Inc. (the “Company”) was incorporated in the State of Nevada on February 23, 2010 under the name Verve
Ventures, Inc. On December 7, 2011, the Company changed its name to American Strategic Minerals Corporation and were engaged in exploration
and potential development of uranium and vanadium minerals business. In June 2012, the Company discontinued the minerals business and
began to invest in real estate properties in Southern California. In October 2012, the Company discontinued its real estate business
and the Company commenced IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc.
On November 1, 2017, the Company entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”), which is focused
on mining digital assets. The Company purchased cryptocurrency mining machines and established a data center in Canada to mine digital
assets. The Company expanded its activities in the mining of new digital assets, while at the same time harvesting the value of its remaining
IP assets. As of October 2020, the financial operations were brought in house and are completed by the Company’s accounting team
that consists of a Chief Financial Officer, Chief Operating Officer and bookkeeper. Subsequent to December 31, 2020, the Company hired
a full-time Controller. We have also moved all of our data mining operations that were operating in Canada prior to 2021 to our new facility
in Hardin, Montana.
The
Company’s Board of Directors adopted the reverse stock split approved by its shareholders at its December 2018 Board Meeting. Upon
the effectiveness of the reverse stock split, every four shares of issued and outstanding common stock before the open of business on
April 8, 2019 was combined into one issued and outstanding share of common stock, with no change in par value per share. All share and
per share values for all periods presented in the accompanying consolidated financial statements have been retroactively adjusted to
reflect the 1:4 Reverse Split.
On
January 1, 2018, our Board adopted the 2018 Equity Incentive Plan, subsequently approved by the stockholders on March 7, 2018, pursuant
to which up to 625,000 shares of common stock, stock options, restricted stock, preferred stock, stock-based awards and other awards
are reserved for issuance as awards to employees, directors, consultants, advisors and other service providers.
On
May 21, 2019, the Company received notice from the Nasdaq Capital Market (the “Capital Market”) that the Company has failed
to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing as required under Listing Rule 5550(b)(1) as
its Form 10-Q for the period ended March 31, 2019 reported stockholders’ equity of $2,158,192. On July 23, 2019, we announced Nasdaq
approved the Company’s plan to regain compliance, and the Company was required to file its Form 10-Q for the period ending September
30, 2019 with the SEC on or before November 13, 2019, which it did, evidencing compliance with the stockholders’ equity requirement.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
On
September 30, 2019, the Company consummated the purchase of 6000 S-9 Bitmain 13.5 TH/s Bitcoin Antminers (“Miners”) from
SelectGreen Blockchain Ltd., a British Columbia corporation, for which the purchase price was $4,086,250 or 2,335,000 shares of its common
stock at a price of $1.75 per share. As a result of an exchange cap requirement imposed in conjunction with the Company’s Listing
of Additional Shares application filed with Nasdaq to the transaction, the Company issued 1,276,442 shares of its common stock which
represented $2,233,773 of the $4,086,250 (constituting 19.9% of the issued and outstanding shares on the date of the Asset Purchase Agreement)
and upon the receipt of shareholder approval, at the Annual Shareholders Meeting to be held on November 15, 2019, the Company can issue
the balance of the 1,058,558 unregistered common stock shares. The shareholders did approve the issuance of the additional shares at
the Annual Shareholders Meeting. The Company has issued an additional 474,808 at $0.90 per share. The $513,700 set forth on the balance
sheet for mining servers payable reflects the fair value of 583,750 shares to be issued at $0.88 per share to conclude the purchase of
the Miners at December 31, 2020. The Company recorded change in fair value of mining payable of $66,547 and $507,862 during the year
ended December 31, 2020 and 2019, respectively. There is no requirement for the Company to make a payment in cash in lieu of issuing
the remaining shares. Subsequent to year end, on January 14, 2021, the Company sold its inventory of approximately 5,900 S9, 13.5 TH/s
miners. As such, management determined that those crypto-currency machines were impaired by a total of $871,302 based upon an assessment
as of December 31, 2020.
On
May 11, 2020, the Company purchased 700
new generation M305+ASIC Miners from MicroBT for approximately $1.3 million. The 700 miners produce 80/Th and will generate 56 PH/s (petahash)
of hashing power, compared to the Company’s current S-9 production of 46 PH/s. These next generation MicroBT ASIC miners are markedly
more energy efficient than our existing Bitmain models.
These miners were delivered to the Company’s Hosting Facility in June 2020 and are producing Bitcoins.
The
Company purchased 660
latest generation Bitmain S19 Pro Miners on May
12, 2020, 500
units on May 18, 2020 and an additional 500
units on June 11, 2020. These
miners produce 110 TH/s and will generate 73 PH/s (petahash) of hashing power, compared to the Company’s S-9 production of 46 PH/s.
The Company made the payments of approximately $4.2 million in the second quarter of 2020 and received 660 of the 1,660 units at its
Hosting Facility in August 2020, and its hosting partner, Compute North, had installed them upon their arrival. Of
the 1,000 remaining S-19 Pro Miners due to arrive in the 4th quarter of 2020, 500 were received in November of 2020 and installed in
the Company’s Hosting Facility in Montana, while another 60 miners were received and placed into service in January 2021. The remaining
440 miners that were anticipated to arrive in the 4th quarter of 2020 were cancelled and the Company received a refund of
the original purchase price of $1.1 million in January 2021.
On
July 29, 2020, the Company announced the purchase of 700
next generation M31S+ASIC Miners from MicroBT.
The miners arrived mid-August of 2020.
On
August 13, 2020, the Company entered into a Long Term Purchase Contract with Bitmaintech PTE., LTD (“Bitmain”) for the purchase
of 10,500 next generation Antminer S-19 Pro ASIC Miners. The purchase price per unit is $2,362 ($2,206 with a 6.62% discount) for a total
gross purchase price of $24,801,000. The parties confirm that the total hashrate of the Antminers under this agreement shall not be less
than 1,155,000 TH/s. Subsequent to executing this agreement, due to the additional executed contracts, Bitmain applied a total net discount
of 8.63% to the purchase price adjusting the amount due to $22,660,673.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
As
of December 31, 2021, the Company has paid the entire purchase price under this agreement and received all 10,500
units from Bitmain.
On
October 6, 2020, the Company entered into a series of agreements with affiliates of Beowulf Energy LLC, a Delaware limited liability
company (collectively and as applicable, “Beowulf”) and Two Point One, LLC, a Delaware limited liability company (“2Pl”;
Marathon, Beowulf and 2Pl each a “Party” and, collectively, the “Parties”). Beowulf and 2Pl have designed
and developed a data center facility of up to 100-megawatts (the “Facility”) that is located next to, and
supplied energy directly from, Beowulf’s power generating station in Hardin, MT (the “Hardin Station”). The Facility
was developed in two phases to reach its 100 MW capacity, and the Hardin Station will supply the Facility exclusively with
energy to operate Bitcoin mining servers.
The
projected build out cost for Phase I is approximately $23 million, which is front loaded as the infrastructure is being built for the
full 100 MW project. Phase I accounts for 70 MW of the 100 MW project. It entails high voltage equipment to break down the full 100 MW
load from the generating station, and thereafter, the infrastructure cost per MW is a matter of distributing power at a container level.
Assuming market conditions similar to current, the build out cost for Phase II works out to approximately $200,000 - $250,000 per MW.
These are all in costs covering all equipment and labor needed starting from the power coming off the Generating Station distributed
down to running the actual miners: including breakers, transformers, switches, containers, PDUs, fans, network cables, and the like.
Marathon
and Beowulf entered into an exclusive Power Purchase Agreement for the initial supply of 30 MW (Phase I), and up to 100 MW in the aggregate
(Phase II), of energy load to the Facility at a cost of $0.028/kWh. The initial term of the Power Purchase Agreement is five years, with
up to five additional three-year extensions, as mutually agreed, assuming 75% energy utilization of the initial 30 MW of energy supplied
to the Facility. Marathon purchased certain mining infrastructure and equipment for the Facility from Beowulf for a purchase price of
$750,000, and Marathon has the right, at no additional cost, to construct and access the Facility on land adjacent to the Hardin Station
pursuant to a lease agreement with Beowulf. After the execution of the contract, the Company entered into additional miner purchase agreements.
Due to the increased size of the Company’s fleet of miners, Phase I was increased from the initial 30 MW to 70 MW, while Phase
II will encompass the completion of the remaining 30 MW for the project.
Beowulf
and 2P1 will provide operation and maintenance services for the Facility pursuant to a Data Facility Services Agreement, in exchange
for an initial issuance of 3,000,000 shares of Marathon’s common stock to each of Beowulf and 2Pl valued at the time of execution
at $1.87 per share or $11,220,000 in aggregate. Upon completion of Phase I, Marathon will issue to Beowulf an additional 150,000 shares
of its common stock. During Phase II, Marathon will issue to Beowulf an additional 350,000 shares of its common stock – 150,000
shares upon reaching 60 MW of Facility load and 200,000 at completion of the full 100 MW of Facility load. The cost to maintain and run
the Facility will be $0.006/kWh. All shares issued under the Data Facility Services Agreement are issued pursuant to transactions exempt
from registration under Section 4(a)(2) of the Securities Act of 1933.
On
October 23, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19 Pro ASIC
Miners. The 2021 delivery schedule will be 2,500 Units in January, 4,500 Units in February and the final 3,000 Units in March 2021.The
gross purchase price is $23,620,000 with 30% due upon the execution of the contract and the balance paid over the next 4 months. Subsequent
to executing this agreement, due to the additional executed contracts, Bitmain applied a discount of 8.63% to the purchase price adjusting
the amount due to $21,581,594. As of December 31, 2021, the Company has paid the entire purchase price under this agreement and received
all 10,000 units from Bitmain.
As
of the November 12, 2020, the Company sold all shares of our common stock available thereunder for an aggregate purchase price of $100,000,000
under our 2020 At the Market Offering pursuant to our registration statement on Form S-3 declared effective by the SEC on August 6, 2020,
which was the total amount available for sale thereunder.
On
December 8, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19j Pro ASIC
Miners, with 6,000 units to be delivered in August 2021, and the remaining 4,000 units to be delivered in September 2021. The gross purchase
price is $23,770,000 with 10% of the purchase price due within 48 hours of execution of the contract, 30% due on January 14, 2021, 10%
due on February 15, 2021, 30% due on June 15, 2021 and 20% due on July 15, 2021. Subsequent to executing this agreement, due to the additional
executed contracts, Bitmain applied a discount of 8.63% to the purchase price adjusting the amount due to $21,718,649. As of December
31, 2021, the Company has paid the entire purchase price under this agreement and received all 10,000 units from Bitmain.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
On
December 11, 2020, the Company entered into an At The Market Agreement with HC Wainwright for up to $200,000,000.
On January 12, 2021, the Company also announced that it had successfully completed its previously announced $200
million shelf offering by utilizing its at-the-market
(ATM) facility. The Company ended the 2020 fiscal year with $141.3
million in cash and 81,974,619
shares outstanding.
On
December 23, 2020, the Company executed a contract with Bitmain to purchase an additional 70,000 next generation Antminer S-19 ASIC Miners,
with 7,000 units to be delivered in July 2021, and the remaining 63,000 units to be delivered in December 2021. The purchase price is
$167,763,451. The purchase price for the miners shall be paid as follows: 20% within 48 hours of signing of contract; 30% on or before
March 1, 2021; 4.75% on June 15, 2021; 1.76% on July 15, 2021; 4.58% on August 15, 2021; 10.19% on September 15, 2021; 17.63% on October
15, 2021 and 11.55% on November 15, 2021. As of December 31, 2021, the Company has paid the entire purchase price under this agreement
and received approximately 40,000 units from Bitmain.
On
December 31, 2020, the Company sold 6,632,712
shares of common stock pursuant to the At The
Market offering. Proceeds of $77.1
million net of offering costs of $2.3
million were received on January 4, 2021. Due
to the timing of the proceeds received, another current receivable was recorded in an amount of $74.8
million as of December 31, 2020.
Effective
December 31, 2020, the Board of Directors of the Company ratified the following arrangements approved by its Compensation Committee:
Merrick
Okamoto, CEO was awarded a cash bonus of $2,000,000
which was paid before year end 2020. He was also
awarded a special bonus of 1,000,000
RSUs with immediate vesting. He was given a new
three-year employment agreement effective January 1, 2021 with the same salary and bonus as the prior agreement. He was also granted
the following: award of 1,000,000
RSUs when the company’s market capitalization
reaches and sustains a market capitalization for 30 consecutive days above $500,000,000;
award of 1,000,000 RSUs priced when the company’s market capitalization reaches and sustains a market capitalization for 30 consecutive
days above $750,000,000;
award of 2,000,000
RSUs priced at lowest closing stock price in
past 30 trading days when the company’s market capitalization reaches and sustains a market capitalization for 30 consecutive days
above $1,000,000,000;
and award of 2,000,000
RSUs when the Company’s market capitalization
reaches and sustains a market capitalization for 30 consecutive days above $2,000,000,000.
As of December 31, 2021, Mr. Okamoto had earned all bonuses set forth.
Sim
Salzman, CFO, was granted a bonus payment of $40,000
in cash; and a bonus of 91,324
RSUs with immediate vesting. James Crawford,
COO, was granted a bonus payment of $127,308
in cash and a stock bonus of 57,990
RSUs with immediate vesting. Furthermore, per
his employment agreement, his base salary for the 2021 was increased by 3%.
Compensation
for directors of the board for 2021 was as follows: (i) cash compensation of $60,000 per year for each director, plus an additional
$15,000 per year for each committee chair, paid 25% at the end of each calendar quarter; (ii) for existing directors, the equivalent
of 54,795 RSUs; and (iii) for newly elected directors, a one-time grant of 91,324 RSUs, vesting 25% each calendar quarter during 2021.
For clarification, new directors will also receive the same annual compensation as existing directors in addition to their one time grant.
On
January 12, 2021, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers
named therein (the “Purchasers”), pursuant to which the Company agreed to issue and sell, in a registered direct offering
(the “Offering”), 12,500,000 shares of its common stock (the “Securities”) at an offering
price
of $20.00 per share.
The
Purchase Agreement contains customary representations and warranties and agreements of the Company and the Purchasers and customary indemnification
rights and obligations of the parties. The closing of the Offering occurred on January 15, 2021. The Company received gross proceeds
of $250,000,000 in connection with the Offering, before deducting placement agent fees and related offering expenses.
On
January 25, 2021, the Company announced that it has purchased 4,812.66
BTC in an aggregate purchase price of $150
million through an
investment fund of one managed by NYDIG as the general partner, while the Company retains 100% of the limited partner interests. We expect
to purchase additional bitcoin held by NYDIG Digital Assets Fund III, LP, the investment fund in future periods, though we may also sell
bitcoin in future periods as needed to generate Cash Assets for treasury management purposes.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
On
February 11, 2021, the Company issued 4,701,442 shares of common stock pursuant to the 2018 Equity Incentive Plan.
Effective
March 1, 2021, the Company changed its name to Marathon Digital Holdings, Inc.
On
March 7, 2021, the Company entered into a termination agreement with the 9349-0001 Quebec Inc., to agree to terminate the outstanding
lease. As of that date, the Company was fully released and discharged from any and all obligations under the Lease Agreement. In November
2017, the Company assumed a lease in connection with the mining operations in Quebec, Canada.
On
May 21, 2021, Marathon
Digital Holdings, Inc. (the “Company”) entered into a binding letter of intent with Compute North, LLC to host 73,000
Bitcoin Miners over a staged in implementation between October 2021 and March 2022. The hosting cost is $0.50 per machine per month
and the hosting rate will be $0.044 per kWh. In order to build out the infrastructure without paying for the capital expenditure,
the Company will provide an 18 month bridge loan to Compute North of up to $67
million dollars, in tranches, based upon specified requirements being met. The terms of the contract are limited to three years with
increases thereafter capped at three percent per year thereafter. The Company has also agreed to pay up to $14
million in expedite fees for construction/electrical and supply chain expediting activities. As of December 31, 2021, the Company
paid $8
million of the $14
million in expedite fees recorded as a deposit on the balance sheet and loaned Compute North $30
million. On September 3, 2021, the Company entered into a master agreement with Compute North, LLC whereas the Company will pay an
initial deposit of $14.6
million in aggregate over five instalments. As of December 31, 2021, the Company paid the full $14.6
million initial deposit recorded as advances to vendor on the balance sheet.
On
July 30, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a fully executed contract with Bitmain to
purchase an additional 30,000
S-19j Pro ASIC Miners, with 5,000
units scheduled to be delivered in each of January 2022, February 2022, March 2022, April 2022, May 2022, and June 2022. The
purchase price is $126,000,000 with (i) 25% of the purchase price due paid within one day of execution of the contract, (ii) 35% of
the purchase price of each batch due in consecutive months with 35% of the January 2022 batch due immediately, and then 35% of each
of the remaining five batches due on the 15th of each consecutive month starting August 15, 2021, through December 15, 2021 and
(iii) the remaining 40% of the purchase price of each batch due on the 15th of each consecutive month starting November 15, 2021 and
then 40% of each of the remaining five batches due on the 15th of each consecutive month through April 2022. As of December 31,
2021, the Company has paid $92,015,375
of the total balance of $120,711,500. The amounts paid are classified as advances to vendor on the balance sheet.
On
August 27, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into a Master Securities Loan Agreement (the “Agreement”)
with NYDIG Funding, LLC (“NYDIG”). Pursuant to the Agreement, the Company will loan its bitcoin (“BTC”) to NYDIG
with an interest rate of three percent (3%) per annum. Interest accrues daily and is payable on a monthly basis. The Agreement provides
that the Company may recall its BTC at any time. NYDIG shall, prior to or concurrently with the transfer of the of the BTC to NYDIG,
but in no case later than the close of business on the day of such transfer, transfer to the Company collateral with a market value at
least equal to 100% of the market value of the loaned BTC, and the Company is granted a first priority lien on such collateral. As of
December 31, 2021, the Company loaned 300 BTC to NYDIG. This balance is classified as digital currencies, restricted on the balance sheet.
On December 21, 2021
and December 30, 2021, the Company entered into two separate Simple Agreement for Future Equity (“SAFE”) agreements classified
on the balance sheet as non-current assets. Pursuant to ASC 323, Equity
Method of Accounting for Investments, an investment in another company
is recorded as an asset on the balance sheet at cost. An equity method investment is valued as of a specific reporting date with any
activity related to the investment recorded through the income statement. Investments are typically current assets if the Company intends
to sell them within a year, however as SAFEs have no expiration date, the Company intends to classify these types of investments as a
noncurrent asset due to the indefinite life of the conversion. This balance is classified as investment in SAFE agreements on the balance
sheet.
On
December 22, 2021, Marathon Digital Holdings, Inc. (the “Company”) entered into another Master Securities Loan Agreement
(the “Agreement”) with NYDIG Funding, LLC (“NYDIG”). Pursuant to the Agreement, the Company will loan its bitcoin
(“BTC”) to0 NYDIG with an interest rate of two and a quarter percent (2.25%) per annum. Interest accrues daily and is payable
on a monthly basis. The Agreement provides that the Company may recall its BTC at any time. NYDIG shall, prior to or concurrently with
the transfer of the of the BTC to NYDIG, but in no case later than the close of business on the day of such transfer, transfer to the
Company collateral with a market value at least equal to 100% of the market value of the loaned BTC, and the Company is granted a first
priority lien on such collateral. As of December 31, 2021, the Company loaned an additional 300 BTC for a total amount of 600 BTC to
NYDIG. This balance is classified as digital currencies, restricted on the balance sheet.
Risks
and Uncertainties
The
impact of the worldwide spread of a novel strain of coronavirus (“COVID 19”) has been and continues to be unprecedented and
unpredictable, but based on the Company’s current assessment, the Company does not expect any material impact on its long-term
strategic plans, operations and its liquidity due to the worldwide spread of COVID-19. However, the Company is continuing to assess the
effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world and
its assessment of the impact of COVID-19 may change.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company’s subsidiaries, Marathon Crypto Mining, Inc.,
MARA Pool, LLC, Crypto Currency Patent Holding Company and Soems Acquisition Corp, all of which are dormant as of December 31,
2021. For consolidated entities where the
Company owns less than 100% of the subsidiary, the Company records net loss attributable to non-controlling interests in its consolidated
statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling
parties.
The
Company’s consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances
and transactions have been eliminated.
Use
of Estimates and Assumptions
The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Significant estimates made by management include, but are not
limited to, realization of long-lived assets, deferred income taxes, unrealized tax positions, the realization of digital currencies
and stock-based compensation expense.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased,
to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal
Deposit Insurance Corporation. The Company’s accounts at this institution are insured, up to $250,000,
by the Federal Deposit Insurance Corporation (“FDIC”). For the years ended December 31, 2021 and 2020, the Company’s
bank balances exceeded the FDIC insurance limit in an amount of $267.8
million and $140.3
million, respectively. To reduce its risk associated
with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which
it holds deposits. As of December 31, 2021 and 2020, the Company had cash equivalents of $266.6
million and $129.8
million, respectively.
Segment
Reporting
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
Our chief operating decision–making group (“CODM”) is composed of the chief executive officer and chief financial officer.
The Company currently operates in the Digital Currency Blockchain segment. The Company’s Crypto-currency Machines are located in
the United States, and the Company has employees only in the United States and views its operations as one operating segment as the CODM
reviews financial information on a consolidated basis in making decisions regarding resource allocations and assessing performance.
Digital
Currencies
Digital currencies
are included in current assets in the consolidated balance sheets as an indefinite lived intangible asset. Digital currencies are recorded
at cost less impairment. In performing the quantitative impairment test of the
mined BTC balances as well as recordation of daily revenues,as described in ASC 350-30-35-19,
the Company utilizes the pricing of BTC on a nightly
basis from Coindesk.com (https://www.coindesk.com/price/bitcoin/).
The CoinDesk Bitcoin Price Index (XBX) is the world’s leading reference for the price of bitcoin, used by the largest institutions
active in crypto assets. It is the crypto market standard, benchmarking billions of dollars in registered financial products and pricing
hundreds of millions in daily over-the-counter transactions. Built for replicability and reliability, in continuous operation since 2014,
the “XBX” is relied upon by asset allocators, asset managers, market participants and exchanges Bitcoin, ether and gold prices
are taken at approximately 4pm New York time1. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk
Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.
1
https://www.coindesk.com/indices/xbx/
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when
events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired.
Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first
perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that
it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes
otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss
establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Halving
The
reward for a bitcoin miner changes roughly every four years, or after every 210,000 blocks are mined and gets reduced by half each time,
this whole process is called bitcoin halving. The last halving occurred on May 11, 2020 and reduced the reward per block to 6.25 BTC.
The
following table presents the activities of the digital currencies for the years ended December 31, 2021 and 2020:
SCHEDULE OF ACTIVITIES OF DIGITAL CURRENCIES
| Digital currencies at December 31, 2019 | |
$ | 1,141 | |
| Additions of digital currencies | |
| 4,357,443 | |
| Realized gain on sale of digital currencies | |
| 15,466 | |
| Sale of digital currencies | |
| (2,102,394 | ) |
| Digital currencies at December 31, 2020 | |
$ | 2,271,656 | |
| Additions of digital currencies | |
| 150,463,770 | |
| Realized gain on sale of digital currencies | |
| 11,659 | |
| Impairment of cryptocurrencies | |
| (29,552,991 | ) |
| Interest received on cryptocurrencies, restricted | |
| 129,170 | |
| Disposition of digital currencies | |
| (80,000 | ) |
| Digital currencies at December 31, 2021 | |
$ | 123,243,264 | |
Loan Receivable
On May 21, 2021, Marathon Digital Holdings, Inc. (the “Company”)
entered into a binding letter of intent with Compute North, LLC to host 73,000 Bitcoin Miners over a staged in implementation between
October 2021 and March 2022. The hosting cost is $0.50 per machine per month and the hosting rate will be $0.044 per kWh. In order to
build out the infrastructure without paying for the capital expenditure, the Company will provide an eighteen-month bridge loan to Compute
North of up to $67 million dollars, in tranches, based upon specified requirements being met. The loan receivable is structured as an
interest-only loan with no pre-payment penalty. The interest rate shall be 0% for the initial twelve-month period and 12% for the last
six months. As of December 31, 2021, the Company paid $30 million dollars and is classified as a loan receivable on the balance sheet.
The Company expects the loan receivable to be repaid during 2022.
Property and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. The Company operates in an emerging industry for which limited data is available to make estimates of the
useful economic lives of specialized equipment. Subsequent to December 31, 2020, management has determined that the expected useful
life of transaction verification servers would be five
years. Prior to December 31, 2020, management depreciated these servers over two years. This assessment takes into consideration
the availability of historical data and management’s expectations regarding the direction of the industry including potential changes
in technology. Management reviews this estimate annually and will revise such estimates as and when data comes available.
To
the extent that any of the assumptions underlying management’s estimate of useful life of its transaction verification servers
are subject to revision in a future reporting period either as a result of changes in circumstances or through the availability of greater
quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying
amounts of these assets.
Intangible
Assets
Intangible
assets include the Crypto Currency Patent with original estimated useful life of 17
years. The Company amortizes the cost
of the intangible assets over their estimated useful lives on a straight-line basis. Costs incurred to acquire patents, including legal
costs, are also capitalized as long-lived assets and amortized on a straight-line basis with the associated patent.
The
Company monitors the carrying value of long-lived assets for potential impairment and tests the recoverability of such assets whenever
events or changes in circumstances indicate that the carrying amounts may not be recoverable. If a change in circumstance occurs, the
Company will perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected
future cash flows. If cash flows cannot be separately and independently identified for a single asset, the Company will determine whether
impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying values are in excess
of undiscounted expected future cash flows, the Company will measure any impairment by comparing the fair value of the asset or asset
group to its carrying value. During the year ended December 31, 2021 and 2020, there was no impairment to the intangible assets.
Impairment
of Long-lived Assets
Management
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted
future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. On January 14, 2021, the Company
sold its inventory of approximately 5,900 S9, 13.5 TH/s miners for $616,236. As of December 31, 2020, these assets had a net book value
of $1,487,538. As such, management determined that those crypto-currency machines were impaired by a total of $871,302 based upon an
assessment as of December 31, 2020. During the year ended December 31, 2021 and 2020, the Company’s leasehold improvements were
impaired by $0 and $0, respectively.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Investment
Fund
In
2016, the FASB issued Accounting Standards Update (ASU) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities, that requires entities to generally measure investments in equity
securities at fair value and recognize changes in fair value in net income.
On
January 25, 2021, the Company entered into a limited partnership agreement with NYDIG Digital Assets Fund III, LP
(“Fund”) whereas the Fund purchased 4,812.66 BTC in an aggregate purchase price of $150 million. The Company owns 100%
of the limited partnership interest. The investment fund is included in current assets in the consolidated balance
sheets.
The Fund qualifies and operates as an investment
company for accounting purposes pursuant to the accounting and reporting guidance under ASC 946, Financial Services – Investment
Companies, which requires fair value measurement of the Fund’s investments in digital assets. The digital assets held by the
Fund are traded on a number of active markets globally, including the over-the-counter (“OTC”) market and digital asset
exchanges. A fair value measurement under ASC 820 for an asset assumes that the asset is exchanged in an orderly transaction between
market participants either in the principal market for the asset or, in the absence of a principal market, the most advantageous market
for the asset (ASC 820-10-35-5). An entity must have access to the principal (or most advantageous) market at the measurement date (ASC
820-10-35-6A).
Pursuant to a management agreement, the Fund paid the
Investment Manager a management fee (the “Management Fee”), payable monthly, computed at a rate of 0.50% per annum of the
net asset value of such limited partner’s capital account, according to the opening NAV of the first day of each calendar month
with such opening NAV being equal to the NAV as of 4pm ET on the last day of each preceding calendar month (taking into account expenses
of the Fund charged to the Fund but without taking into account any withdrawal occurring on such date). Effective March 25, 2021, the
rate was reduced to 0.30% per annum. In the event of an additional capital contribution, a withdrawal of a limited partner’s capital
account or the termination of the Fund as of a date other that the first day of a calendar month, the Management Fee payable will be
prorated based on the number of days elapsed in that calendar month. Payment of the Management Fee may be deferred in the General Partner’s
discretion. The Fund’s bitcoin may be liquidated by the Investment Manager as needed in order to pay the Management Fee or other
operating expenses of the Fund.
Revenue
Recognition
The
Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that
a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve
that core principle:
| |
● |
Step
1: Identify the contract with the customer |
| |
|
|
| |
● |
Step
2: Identify the performance obligations in the contract |
| |
|
|
| |
● |
Step
3: Determine the transaction price |
| |
|
|
| |
● |
Step
4: Allocate the transaction price to the performance obligations in the contract |
| |
|
|
| |
● |
Step
5: Recognize revenue when the Company satisfies a performance obligation |
In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in
the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of
a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can
benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e.,
the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the
context of the contract).
If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services
is identified that is distinct.
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
When determining the transaction price, an entity must consider the effects of all of the following:
| |
● |
Variable
consideration |
| |
|
|
| |
● |
Constraining
estimates of variable consideration |
| |
|
|
| |
● |
The
existence of a significant financing component in the contract |
| |
|
|
| |
● |
Noncash
consideration |
| |
|
|
| |
● |
Consideration
payable to a customer |
Variable
consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The
transaction price is allocated to each performance obligation on a relative standalone selling price basis.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in
time or over time as appropriate.
Providing
computing power in crypto asset transaction verification services to the network is the only performance obligation under our arrangements
with the network. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures
at fair value on the date received, which is not materially different than the fair value at the time the Company has earned the award.
The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the
consideration is constrained until the Company successfully places a block (by being the first to solve an algorithm) and the Company
receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component
in these transactions.
Fair
value of the digital asset award received is determined using the average U.S. dollar spot rate of the related digital currency at the
time of receipt.
Expenses
associated with running the digital currency mining business, such as rent and electricity cost are also recorded as cost of revenues.
Depreciation on digital currency mining equipment is recorded as a component of cost of revenues.
Related
Party Transactions
Parties
are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled
by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members
of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if
one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.
On
October 11, 2018, the Company entered into a 2-year Employment Agreement, subject to successive 1 year extension, with Merrick Okamoto,
pursuant to which Mr. Okamoto will serve as the Executive Chairman and Chief Executive Officer of the Company. Pursuant to the terms
of the Agreement, Mr. Okamoto shall receive a base salary at an annual base salary of $350,000 (subject to annual 3% cost of living increase)
and an annual bonus up to 100% of base salary as determined by the Compensation Committee or the Board. As further consideration for
Mr. Okamoto’s services, the Company agreed to issue Mr. Okamoto 10-year stock options to purchase 1,250,000 shares of Common Stock,
with a strike price of $2.32 per share, vesting 50% on the date of grant and 25% on each 6 months anniversary of the date of grant. On
December 31, 2021 Mr. Okamoto retired from the Company and as such as of December 31, 2021 no bonus has been accrued.
On
July 22, 2019, the Company granted David Lieberman, James Crawford and other three board directors 5-year stock options to purchase total
of 200,000 shares of common stock, with an exercise price of $2.04 per share, vesting 50% on the date of grant and 25% on each 6 months
anniversary of the date of grant. On October 19, 2020, David Lieberman retired and at that time, his shares of common stock fully vested.
See
Note 1 for a description of bonuses and restricted stock unit awards to related parties ratified by the Board of Directors as of December
31, 2020.
Fair
Value of Financial Instruments
The
Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit
price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
| |
Level
1: |
Observable
inputs such as quoted market prices in active markets for identical assets or liabilities |
| |
Level
2: |
Observable
market-based inputs or unobservable inputs that are corroborated by market data |
| |
Level
3: |
Unobservable
inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and accrued expenses, approximate
their estimated fair market value based on the short-term maturity of these instruments. The carrying value of notes payable and other
long-term liabilities approximate fair value as the related interest rates approximate rates currently available to the Company.
Financial
assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant
to their fair value measurement. The Company measures the fair value of its marketable securities by taking into consideration valuations
obtained from third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and
market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These
inputs included reported trades of and broker-dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities
and other observable inputs.
The
following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and
the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of December 31, 2021 and 2020,
respectively:
SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS
| | |
Fair value measured at December 31, 2021 | |
| | |
Total carrying value at December 31, | | |
Quoted
prices in active
markets | | |
Significant other observable inputs | | |
Significant unobservable inputs | |
| | |
2021 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| Assets | |
| | |
| | |
| | |
| |
| Money Market Accounts | |
$ | 266,635,158 | | |
$ | 266,635,158 | | |
$ | - | | |
$ | - | |
| Investment Fund | |
$ | 223,778,545 | | |
$ | - | | |
$ | 223,778,545 | | |
$ | - | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Warrant liability | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| | |
Fair value measured at December 31, 2020 | |
| | |
Total carrying value at December 31, | | |
Quoted prices in active markets | | |
Significant other observable inputs | | |
Significant unobservable inputs | |
| | |
2020 | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| Liabilities | |
| | |
| | |
| | |
| |
| Warrant liability | |
$ | 322,437 | | |
$ | - | | |
$ | - | | |
$ | 322,437 | |
There
were no transfers between Level 1, 2 or 3 during the years ended December 31, 2021 and 2020.
At
December 31, 2021, the Company had an outstanding warrant liability in the amount of $0 associated with warrants that were issued in
January 2017 and warrants issued related to the Convertible Notes issued in August and September of 2017. The following table rolls forward
the fair value of the Company’s warrant liability, the fair value of which is determined by Level 3 inputs for the year ended December
31, 2021.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
FV
of warrant liabilities
SCHEDULE OF FAIR VALUE OF WARRANT LIABILITIES
| | |
Fair value | |
| Outstanding as of December 31, 2019 | |
$ | 12,849 | |
| Change in fair value of warrants | |
| 309,588 | |
| Outstanding as of December 31, 2020 | |
$ | 322,437 | |
| Cashless exercise of warrants | |
| (1,370,723 | ) |
| Change in fair value of warrants | |
| 1,048,286 | |
| Outstanding as of December 31, 2021 | |
$ | - | |
The
fair value of the warrant liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating
gain or loss in our statement of operations, until they are completely exercised. The fair value is determined each reporting period
using the Black-Scholes option pricing model and is affected by changes in inputs to that model including our stock price, expected stock
price volatility, dividends, interest rates and expected term.
Non-recurring
measurement of Fair Value
The
Company accounts for its digital currencies as indefinite-lived intangible assets in accordance with Accounting Standards Codification
(“ASC”) 350,I ntangibles – Goodwill and Other. The Company’s digital currencies are initially recorded
at fair value upon receipt (or “carrying value”). On a quarterly basis, they are measured at carrying value, net of any impairment
losses incurred since receipt. Pursuant to guidance from ASC 820, Fair Value Measurement, the Company is required to determine
the nonrecurring fair value measurement used to determine impairment of the digital currencies held on the balance sheet. The Company
will record impairment losses as the fair value falls below the carrying value of the digital currencies. The digital currencies can
only be marked down when impaired and not marked up when their value increases. The resulting carrying value represents the fair value
of the asset. The last impairment date for the digital currencies was December 31, 2021. The Company had an outstanding carrying balance
of digital assets of approximately $123.2 million, net of impairment losses incurred of $29.6 million for the year ended December 31,
2021. As of December 31, 2021, the fair value of the approximate 3,321 bitcoin held as digital currencies is approximately $152.8 million.
Income
Taxes
The
Company accounts for income taxes pursuant to the provision of Accounting Standards Codification (“ASC”) 740-10, “Accounting
for Income Taxes” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The
asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided
to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be
realized.
The
Company follows the provision of the ASC 740-10 related to Accounting for Uncertain Income Tax Position. When tax returns are filed,
it is more likely than not that some positions taken would be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance
with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is most likely that not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated
financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the tax positions taken that
exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance
sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Basic
and Diluted Net Loss per Share
Net
loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share
is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The computation
of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they
would be anti-dilutive.
Securities
that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at December
31, 2021 and 2020 are as follows:
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| | |
2021 | | |
2020 | |
| | |
As of December 31, | |
| | |
2021 | | |
2020 | |
| Warrants to purchase common stock | |
| 326,779 | | |
| 287,656 | |
| Restricted stock | |
| 642,094 | | |
| - | |
| Conversion of convertible notes | |
| 9,812,955 | | |
| - | |
| Options to purchase common stock | |
| - | | |
| 106,120 | |
| Total | |
| 10,781,828 | | |
| 393,776 | |
The
following table sets forth the computation of basic and diluted loss per share:
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
| | |
2021 | | |
2020 | | |
2019 | |
| | |
For the Years Ended December 31, | |
| | |
2021 | | |
2020 | | |
2019 | |
| Net loss attributable to common shareholders | |
$ | (36,174,506 | ) | |
$ | (10,447,771 | ) | |
$ | (3,517,065 | ) |
| | |
| | | |
| | | |
| | |
| Denominator: | |
| | | |
| | | |
| | |
| Weighted average common shares - basic | |
| 99,337,587 | | |
| 81,408,340 | | |
| 6,664,238 | |
| Weighted average common shares - diluted | |
| 99,337,587 | | |
| 81,408,340 | | |
| 6,664,238 | |
| Loss per common share - basic | |
$ | (0.36 | ) | |
$ | (0.13 | ) | |
$ | (0.53 | ) |
| Loss per common share - diluted | |
$ | (0.36 | ) | |
$ | (0.13 | ) | |
$ | (0.53 | ) |
Stock-Based
Compensation
The
Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date
fair value of the awards and forfeiture rates. The Company estimates the fair value of stock option grants using the Black-Scholes option
pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates
and involve inherent uncertainties and the application of management’s judgment. These assumptions are the expected stock volatility,
the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture
rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected term
of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate
term.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Leases
The
Company accounts for its leases under ASC 842, Leases.
Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded
on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over
the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by
interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest
on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. Variable
lease expenses, if any, are recorded when incurred.
In
calculating the right of use asset and lease liability, the Company elected to combine lease and non-lease components. The Company excluded
short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent
expense on a straight-line basis over the lease term.
Recent
Accounting Pronouncements
In
December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)”, which
is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general
principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The
Company has adopted this pronouncement and has determined there has been no material impact of this standard on its consolidated
financial statements and related disclosures.
In 2020, the Financial Accounting Standards Board
issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity, to address the complexity in accounting for certain financial instruments with characteristics of liabilities
and equity. Amongst other provisions, the amendments in this ASU significantly change the guidance on the issuer’s accounting for
convertible instruments and the guidance on the derivative scope exception for contracts in an entity’s own equity such that fewer
conversion features will require separate recognition, and fewer freestanding instruments, like warrants, will require liability treatment.
This guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company adopted ASU
2020-06 early as of January 1, 2021. Such adoption did not result in any material changes to its financial position, results of operations
or cash flows.
Any
new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future
date are not expected to have a material impact on the consolidated financial statements upon adoption.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
3 – DEPOSIT, PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
On
September 30, 2019, the Company consummated the purchase of 6000 S-9 Bitmain 13.5 TH/s Bitcoin Antminers (“Miners”) from
SelectGreen Blockchain Ltd., a British Columbia corporation, for which the purchase price was $4,086,250 or 2,335,000 shares of its common
stock at a price of $1.75 per share. As a result of an exchange cap requirement imposed in conjunction with the Company’s Listing
of Additional Shares application filed with Nasdaq to the transaction, the Company issued 1,276,442 shares of its common stock which
represented $2,233,773 of the $4,086,250 (constituting 19.9% of the issued and outstanding shares on the date of the Asset Purchase Agreement)
and upon the receipt of shareholder approval, at the Annual Shareholders Meeting to be held on November 15, 2019, the Company can issue
the balance of the 1,058,558 unregistered common stock shares. The shareholders did approve the issuance of the additional shares at
the Annual Shareholders Meeting. The Company has issued an additional 474,808 at $0.90 per share. The $513,700 set forth on the balance
sheet for mining servers payable reflects the fair value of 583,750 shares to be issued at $0.88 per share to conclude the purchase of
the Miners at December 31, 2020. The Company recorded change in fair value of mining payable of $0 and $66,547 during the year ended
December 31, 2021 and 2020, respectively. There is no requirement for the Company to make a payment in cash in lieu of issuing the remaining
shares.
On
May 11, 2020, the Company signed a Contract Addendum with Compute North, to pause and suspend services under its Colocation Agreement.
This will suspend all production of Bitcoin using our S-9 miners.
On
May 11, 2020, the Company purchased 700 new generation M305+ASIC Miners from MicroBT for approximately $1.3
million. The
700 miners produce 80/Th and will generate 56 PH/s (petahash) of hashing power, compared to the Company’s current S-9 production
of 46 PH/s. These next generation MicroBT ASIC miners were markedly more energy efficient than the Bitmain S-9 models.
These miners were delivered to the Company’s
Hosting Facility in June 2020 and are producing Bitcoins.
The
Company purchased 660
latest generation Bitmain S19 Pro Miners on May
12, 2020, 500
units on May 18, 2020 and an additional 500
units on June 11, 2020. These miners produce
110 TH/s and will generate 73 PH/s (petahash) of hashing power, compared to the Company’s S-9 production of 46 PH/s. The Company
made the payments of approximately $4.2
million in the second quarter of 2020 and received 660 of the
1,660 units at its Hosting Facility in August of 2020, and its hosting partner, Compute North, had installed them upon their arrival.
Of the 1,000 remaining S-19 Pro Miners due to arrive in the 4th quarter of 2020, 500 were received in November of 2020
and installed in the Company’s Hosting Facility in Montana, while another 60 miners were received and placed into service in
January 2021. The remaining 440 miners that were anticipated to arrive in the 4th quarter of 2020 were cancelled and the Company
received a refund of the original purchase price of $1.1 million in January 2021.
On
July 29, 2020, the Company announced the purchase of 700
next generation M31S+ASIC Miners from MicroBT.
The miners arrived mid-August of 2020. On August 13, 2020, the Company entered into a Long Term Purchase Contract with Bitmaintech
PTE., LTD (“Bitmain”) for the purchase of 10,500
next generation Antminer S-19 Pro ASIC Miners.
The
purchase price per unit is $2,362 ($2,206 with a 6.62% discount) for a total purchase price of $24,801,000 (with a 6.62% discount for
a discounted price of $23,159,174). The parties confirm that the total hashrate of the Antminers under this agreement shall not be less
than 1,155,000 TH/s.
Subsequent
to executing this agreement, due to the additional executed contracts, Bitmain applied a total net discount of 8.63% to the purchase
price adjusting the amount due to $22,660,673.
Subject
to the timely payment of the purchase price, Bitmain shall deliver products according to the following schedule: 1,500 Units on or before
January 31, 2021; and 1,800 units on or before each of February 28, 2021; March 31, 2021; April 30, 2021, May 31, 2021 and June 30, 2021.
As of December 31, 2021, the Company has paid the entire purchase price under this agreement and has received 10,500 units from Bitmain.
On
October 23, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19 Pro ASIC
Miners. The 2021 delivery schedule was for 2,500 units to be delivered in January, 4,500 units to be delivered in February and the final
3,000 units to be delivered in March 2021.The gross purchase price was $23,620,000 with 30% due upon the execution of the contract and
the balance paid over the next 4 months. Subsequent to executing this agreement, due to the additional executed contracts, Bitmain applied
a discount of 8.63% to the purchase price adjusting the amount due to $21,581,594. As of December 31, 2021, the Company has paid the
entire purchase price under this agreement and has received 10,000 units from Bitmain.
On
December 8, 2020, the Company executed a contract with Bitmain to purchase an additional 10,000 next generation Antminer S-19j Pro ASIC
Miners, with 6,000 units to be delivered in August 2021, and the remaining 4,000 units to be delivered in September 2021. The gross purchase
price is $23,770,000 with 10% of the purchase price due within 48 hours of execution of the contract, 30% due on January 14, 2021, 10%
due on February 15, 2021, 30% due on June 15, 2021 and 20% due on July 15, 2021. Subsequent to executing this agreement, due to the additional
executed contracts, Bitmain applied a discount of 8.63% to the purchase price adjusting the amount due to $21,718,649. As of December
31, 2021, the Company has paid the entire purchase price under this agreement and has received 10,000 units from Bitmain.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
On
December 23, 2020, the Company executed a contract with Bitmain to purchase an additional 70,000 next generation Antminer S-19 ASIC Miners,
with 7,000 units to be delivered by August 2021, 2,100 units to be delivered by September 2021, 6,500 units to be delivered by October
31, 2021, 14,700 units to be delivered by November 30, 2021, 24,500 units to be delivered by December 31, 2021 and 15,200 units to be
delivered by January 31, 2022. The purchase price is $167,763,451. The purchase price for the miners shall be paid as follows: 20% within
48 hours of signing of contract; 30% on or before March 1, 2021; 4.75% on June 15, 2021; 1.76% on July 15, 2021; 4.58% on August 15,
2021; 10.19% on September 15, 2021; 17.63% on October 15, 2021 and 11.55% on November 15, 2021. As of December 31, 2021, the Company
has paid the entire purchase price under this agreement and has received 40,000 units from Bitmain.
On
February 1, 2021, Marathon announced that Bitmain had shipped approximately 4,000 S-19 Pro ASIC miners to the Company’s mining
facility in Hardin, MT, all of which were delivered as scheduled.
In
addition to the initial 4,000 miners delivered to the Hardin facility in February, Bitmain has shipped another 26,050 miners to Hardin.
Marathon has received over 30,050 miners as of December 31, 2021 and subsequent to year end increased its active mining fleet to approximately
32,710 miners generating approximately 3.6 EH/s.
On
December 21, 2021, the Company executed a contract with Bitmain to purchase an additional 78,000 next generation Antminer S-19 XP Miners,
with 13,000 units being delivered in each of July 2022, August 2022, September 2022, October 2022, November 2022 and December 2022. The
purchase price is $879,060,000. The purchase price for the miners shall be paid as follows: 35% of the total amount within two days of
execution of the purchase contract, 35% of each single shipment price at least six months prior to each such shipment, and the remaining
30% of each single shipment price at least one month prior to each such shipment. As of December 31, 2021, the Company has paid $307,671,000
of the purchase price.
As of December 31, 2021, approximately $466.3
million cash paid for miners was recorded as a deposit on the balance sheet.
The
components of property, equipment and intangible assets as of December 31, 2021 and 2020 are:
SCHEDULE OF COMPONENTS OF PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
| | |
Useful life (Years) | | |
December 31, 2021 | | |
December 31, 2020 | |
| Website | |
| 7 | | |
$ | 121,787 | | |
$ | 121,787 | |
| Mining equipment | |
| 5 | | |
| 163,868,283 | | |
| 12,989,318 | |
| Construction in Progress | |
| N/A | | |
| 133,565,908 | | |
| 10,593,575 | |
| Mining patent | |
| 17 | | |
| 1,210,000 | | |
| 1,210,000 | |
| Gross property, equipment and intangible assets | |
| | | |
| 298,765,978 | | |
| 24,914,680 | |
| Less: Accumulated depreciation and amortization | |
| | | |
| (21,591,958 | ) | |
| (6,687,957 | ) |
| Property, equipment and intangible assets, net | |
| | | |
$ | 277,174,020 | | |
$ | 18,226,723 | |
As
of December 31, 2021, intangible assets amortization are as follows:
SCHEDULE
OF INTANGIIBLE ASSETS AMORTIZATION
| | |
| | |
| 2022 | |
| 71,176 | |
| 2023 | |
| 71,176 | |
| 2024 | |
| 71,176 | |
| 2025 | |
| 71,176 | |
| 2026 | |
| 71,176 | |
| Thereafter | |
| 575,346 | |
| Total | |
$ | 931,226 | |
As of December 31, 2020, intangible assets amortization
are as follows:
| | |
| |
| 2021 | |
| 71,176 | |
| 2022 | |
| 71,176 | |
| 2023 | |
| 71,176 | |
| 2024 | |
| 71,176 | |
| 2025 | |
| 71,176 | |
| Thereafter | |
| 646,522 | |
| Total | |
$ | 1,002,402 | |
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
4 - STOCKHOLDERS’ EQUITY
We
are authorized to issue 200,000,000 shares of common stock and 50,000,000 shares of preferred stock, at $.0001 par value per share. As
of December 31, 2021, we have 102,733,273 shares of our common stock and no shares of our preferred stock issued and outstanding.
Common
Stock
At
The Market Offering Agreement
On
July 19, 2019, we entered into an At The Market Offering Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC
(“H.C. Wainwright”) which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our
common stock, par value $0.0001 per share (“Common Stock”), from time to time as set forth in the Agreement. The Agreement
provides for the sale of shares of our Common Stock (“Shares”) having an aggregate offering price of up to $7,472,417.
Subject
to the terms and conditions set forth in the Agreement, H.C. Wainwright will use its commercially reasonable efforts consistent with
its normal trading and sales practices to sell the Shares from time to time, based upon our instructions. We have provided H.C. Wainwright
with customary indemnification rights, and H.C. Wainwright will be entitled to a commission at a fixed rate equal to three percent (3.0%)
of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in connection with
the Agreement, including up to $25,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the earlier
of sale of all of the Shares under the Agreement or July 19, 2022 unless terminated earlier by either party as permitted under the Agreement.
Sales
of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings”
as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including sales made by means
of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with H.C. Wainwright.
We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.
Follow
On Offering
On
July 23, 2020, the Company entered into an underwriting agreement with H.C. Wainwright. The Company agreed to sell H.C. Wainwright 7,666,666
shares of its common stock, including the exercise in full by H.C. Wainwright of the option to purchase an additional 999,999 shares
of common stock, at a public offering price of $0.90 per share. The gross proceeds of this offering, which closed on July 28, 2020, were
approximately $6.9 million, and proceeds, net of underwriting discount and expenses of $0.6 million, were $6.3 million. Additionally,
representative’s warrant to purchase 536,667 shares of our common stock with a five year term and an exercise price of $1.125 per
share were issued.
Shelf
Registration Statements on Form S-3 and At The Market Offering Agreements
On
August 13, 2020, the Company’s Shelf Registration Statement on Form S-3, filed on August 6, 2020, was declared effective by the
SEC, along with the Company’s At The Market Offering Agreement, entered into by the Company and H.C. Wainwright & Co., LLC,
as Exhibit 1.1 to the Form S-3 (the “2020 At The Market Agreement”). This 2020 At the Market Agreement establishes an at-the-market
equity program pursuant to which the Company may offer and sell shares of its common stock, par value $0.0001 per share, with an aggregate
offering price of up to $100 million, from time to time as set forth in the agreement.
On
December 22, 2020, the Company’s Shelf Registration Statement on Form S-3, filed on December 11, 2020, was declared effective by
the SEC, along with the Company’s At The Market Offering Agreement, entered into by the Company and H.C. Wainwright & Co.,
LLC, as Exhibit 1.1 to the Form S-3 (the “2020 At The Market Agreement”). This 2020 At the Market Agreement establishes an
at-the-market equity program pursuant to which the Company may offer and sell shares of its common stock, par value $0.0001 per share,
with an aggregate offering price of up to $200 million, from time to time as set forth in the agreement.
On January 12, 2020, the Company, entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”),
pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), 12,500,000 shares
of its common stock (the “Securities”) at an offering price of $20.00 per share. The Purchase Agreement contains customary
representations and warranties and agreements of the Company and the Purchasers and customary indemnification rights and obligations
of the parties. The closing of the Offering occurred on January 15, 2021. The Company received gross proceeds of $250,000,000 in connection
with the Offering, before deducting placement agent fees and related offering expenses.
Pursuant to a letter agreement, dated August 2020
(the “Engagement Letter”), the Company engaged H.C. Wainwright & Co., LLC (the “Placement Agent”) as placement
agent in connection with the Offering. The Placement Agent agreed to use its reasonable best efforts to arrange for the sale of the Securities.
The Company agreed to pay to the Placement Agent a cash fee of 5.0% of the aggregate gross proceeds raised in the Offering. The Company
also issued to designees of the Placement Agent warrants to purchase up to 3.0% of the aggregate number of shares of Common Stock sold
in the transactions, or warrants to purchase up to 375,000 shares of Common Stock (the “Placement Agent Warrants”). The Placement
Agent Warrants have an exercise price equal to 125% of the offering price per share (or $25.00 per share). The Company also agreed to
pay the Placement Agent $50,000 for accountable expenses, to reimburse an investor’s legal fees in an amount up to $7,500 and to
pay $12,900 for the Placement Agent’s clearing fees. Pursuant to the terms of the Engagement Letter, the Placement Agent has the
right, for a period of twelve months following the closing of the Offerings, to act (i) as financial advisor in connection with any merger,
consolidation or similar business combination by the Company and (ii) as sole book-running manager, sole underwriter or sole placement
agent in connection with certain debt and equity financing transactions by the Company. As of December 31, 2021, warrants to purchase
up to 324,375 shares of Common Stock related to the Securities Purchase Agreement remain outstanding.
During
the year ended December 31, 2020, 54,301,698 shares of common stock were issued under the Company’s 2020 At The Market Agreements
for total proceeds of approximately $307.1 million, net of offering costs, of $9.4 million, and the Company has sold all shares possible
under the Agreements.
During
the year ended December 31, 2019, 172,126 of common stock were issued under the Company’s 2019 At The Market Agreements for total
proceeds of approximately $0.3 million, net of offering costs, of $0.01 million, and the Company has sold all shares possible under the
Agreements.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Other
2020 Common Stock Activity
During 2020, the Company issued 54,301,698 shares
of common stock under the At The Market Offering for the total proceeds of $307,064,401, net of offering cost of $9,405,129.
On
March 30, 2020, the Company issued 350,250 shares of common stock in exchange for S9 miners with a fair market value of $612,938.
On
June 1, 2020, the Company issued 2,023,739 shares of common stock in exchange for the conversion and extinguishment of the note payable
outstanding in an amount of $999,106.
On
October 6, 2020, the Company issued 6,000,000 shares of common stock in exchange for five years of services pursuant to the Power Purchase
Agreement and Data Facility Services Agreement for the total proceeds of $0, net of offering cost of $0 valued at the time of execution
at $1.87 per share or $11,220,000 in aggregate.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
2019
Common Stock Activity
During 2019, the Company issued 172,126 shares
of common stock under the At The Market Offering for the total proceeds of $255,893, net of offering cost of $10,442.
On
October 1, 2019, the Company issued 150,000 shares of its common stock to a consultant. The fair value of the common stock was $259,500.
Common
Stock Warrants
A
summary of the status of the Company’s outstanding stock warrants and changes during year ended is as follows:
SUMMARY OF OUTSTANDING STOCK WARRANTS
| | |
Number of Warrants | | |
Weighted Average
Exercise Price | | |
Weighted
Average Remaining Contractual Life
(in years) | |
| Outstanding as of December 31, 2019 | |
| 182,191 | | |
$ | 25.04 | | |
| 2.8 | |
| Issued | |
| 536,667 | | |
$ | 1.13 | | |
| 4.6 | |
| Expired | |
| (17,969 | ) | |
| 59.14 | | |
| - | |
| Exercised | |
| (413,233 | ) | |
| 1.13 | | |
| - | |
| Outstanding as of December 31, 2020 | |
| 287,656 | | |
$ | 12.64 | | |
| 2.7 | |
| Issued | |
| 375,000 | | |
| 25.00 | | |
| 4.3 | |
| Expired | |
| (19,792 | ) | |
| 27.20 | | |
| - | |
| Exercised | |
| (316,085 | ) | |
| 14.42 | | |
| - | |
| Outstanding as of December 31, 2021 | |
| 326,779 | | |
$ | 25.54 | | |
| 3.5 | |
| Warrants exercisable as of December 31, 2021 | |
| 326,779 | | |
$ | 25.54 | | |
| 3.5 | |
The
aggregate intrinsic value of options outstanding and exercisable at December 31, 2021 was $2,549,588.
On
July 23, 2020, the Company entered into an underwriting agreement with H.C. Wainwright. The Company agreed to sell H.C. Wainwright 7,666,666
shares of its common stock, including the exercise in full by H.C. Wainwright of the option to purchase an additional 999,999 shares
of common stock, at a public offering price of $0.90 per share. The gross proceeds of this offering, which closed on July 28, 2020, were
approximately $6.9 million, and proceeds, net of underwriting discount and expenses of $0.6 million, were $6.3 million. Additionally,
representative’s warrant to purchase 536,667 shares of our common stock with a five year term and an exercise price of $1.125 per
share were issued.
Pursuant to a letter agreement, dated August 2020
(the “Engagement Letter”), the Company engaged H.C. Wainwright & Co., LLC (the “Placement Agent”) as placement
agent in connection with the Offering. The Placement Agent agreed to use its reasonable best efforts to arrange for the sale of the Securities.
The Company agreed to pay to the Placement Agent a cash fee of 5.0% of the aggregate gross proceeds raised in the Offering. The Company
also issued to designees of the Placement Agent warrants to purchase up to 3.0% of the aggregate number of shares of Common Stock sold
in the transactions, or warrants to purchase up to 375,000 shares of Common Stock (the “Placement Agent Warrants”). The Placement
Agent Warrants have an exercise price equal to 125% of the offering price per share (or $25.00 per share). The Company also agreed to
pay the Placement Agent $50,000 for accountable expenses, to reimburse an investor’s legal fees in an amount up to $7,500 and to
pay $12,900 for the Placement Agent’s clearing fees. Pursuant to the terms of the Engagement Letter, the Placement Agent has the
right, for a period of twelve months following the closing of the Offerings, to act (i) as financial advisor in connection with any merger,
consolidation or similar business combination by the Company and (ii) as sole book-running manager, sole underwriter or sole placement
agent in connection with certain debt and equity financing transactions by the Company. As of December 31, 2021, warrants to purchase
up to 324,375 shares of Common Stock related to the Securities Purchase Agreement remain outstanding.
Common
Stock Options
On
July 22, 2019, the Company’s board has approved to issue 275,000 shares of option to purchase the Company’s common stock
to 8 employees and consultants for the service they provided. The options have a five-year term with an exercise price of $2.04, vesting
50% on the date of grant and 25% on each 6 months anniversary of the date of grant. The options were valued based on the Black-Scholes
model, using the strike of $2.04 per share, an average expected term of 2.69 years, volatility of 39.46% based on the average volatility
of comparable companies over the comparable prior period.
On
May 5, 2020, the Compensation Committee of the Board of Directors held a meeting and approved bonuses and stock option grants for Directors
and Officers for their contributions to the growth of Marathon Patent Group, Inc., for the year ended December 31, 2020. Total awards
to be granted amounted to 1,158,138 restricted stock units at a price of $0.43 per unit with a term of one year, vesting quarterly in
equal amounts, and (ii) cash award of $105,000 to Merrick Okamoto and $54,000 to David Lieberman. In addition, the Compensation Committee
agreed to cancel 1,587,500 existing stock options for Directors, Officers and outside legal counsel, and replace them with 1,587,500
restricted stock units at a price of $0.43 per unit with a term of one year, vesting quarterly in equal amounts.
Due
to the conversion of stock options to restricted stock options during 2020, the grant date fair value of stock options granted to employees
during the years ended December 31, 2021 and 2020 were $0 and $0, respectively. Estimated future stock-based compensation expense relating
to unvested stock options is approximately $0 as of December 31, 2021.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
A
summary of the stock options as of December 31, 2021 and changes during the year ended is as follows:
SUMMARY OF STOCK OPTIONS
| | |
Number of
Shares | | |
Weighted
Average
Exercise Price | | |
Weighted
Average Remaining Contractual Life
(in years) | |
| Outstanding as of December 31, 2020 | |
| 106,120 | | |
$ | 44.32 | | |
| 4.28 | |
| Exercised | |
| (25,000 | ) | |
| 2.04 | | |
| - | |
| Expired | |
| (81,120 | ) | |
| - | | |
| - | |
| Outstanding as of December 31, 2021 | |
| - | | |
$ | - | | |
| - | |
| Options vested and expected to vest as of December 31, 2021 | |
| - | | |
$ | - | | |
| - | |
| Options vested and exercisable as of December 31, 2021 | |
| - | | |
$ | - | | |
| - | |
The
aggregate intrinsic value of options outstanding and exercisable at December 31, 2021 was $0.
A
summary of the RSUs as of December 31, 2021 and 2020, respectively and changes during the period are presented below:
SUMMARY OF RESTRICTED STOCK AWARD ACTIVITY
| | |
Number
of Units | | |
Weighted Average Grant Date Fair Value | |
| Nonvested at December 31, 2020 | |
| 566,279 | | |
$ | 0.43 | |
| Granted | |
| 8,313,410 | | |
$ | 20.89 | |
| Vested | |
| (8,237,595 | ) | |
$ | 18.31 | |
| Nonvested at December 31, 2021 | |
| 642,094 | | |
$ | 35.93 | |
NOTE
5 – DEBT, COMMITMENTS AND CONTINGENCIES
Debt
consists of the following:
SCHEDULE
OF DEBT
| | |
Maturity | |
Interest | | |
December 31, | | |
December 31, | |
| | |
Date | |
Rate | | |
2021 | | |
2020 | |
| | |
| |
| | |
| | |
| |
| Convertible Note | |
11/15/2026 | |
| 1 | % | |
$ | 747,500,000 | | |
$ | - | |
| Less: debt discount | |
| |
| | | |
| 19,094,078 | | |
| - | |
| Total convertible notes, net of discount | |
| |
| | | |
$ | 728,405,922 | | |
$ | - | |
| | |
| |
| | | |
| | | |
| | |
| Total | |
| |
| | | |
$ | 728,405,922 | | |
$ | - | |
| Less: current portion | |
| |
| | | |
| - | | |
| - | |
| Long term portion | |
| |
| | | |
$ | 728,405,922 | | |
$ | - | |
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
During
the year ended December 31, 2021 and 2020, there was amortization of debt discount of $0.3 million and $0, respectively. Interest expenses
were $1.6 million and $22,815 for the years ended December 31, 2021 and 2020, respectively.
Convertible Note
On November 18, 2021,
the Company issued $650,000,000 principal amount of its 1.00% Convertible Senior Notes due 2026 (the “Notes”). The
Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of November 18, 2021,
between the Company and U.S. Bank National Association, as trustee (the “Trustee”). Pursuant to the purchase agreement
between the Company and the initial purchasers of the Notes, the Company also granted the initial purchasers an option, for settlement
within a period of 13 days from, and including, November 18, 2021 to purchase up to an additional $97,500,000 principal amount of Notes,
which additional Notes were purchased on November 23, 2021, for an aggregate principal amount of Notes purchased of $747,500,000. All
references in this disclosure to “Notes” includes the Notes issued on both November 18, 2021 and November 23, 2021..
The Notes will be the
Company’s senior, unsecured obligations and will be (i) equal in right of payment with the Company’s existing and future
senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly
subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent
of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness
and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of
the Company’s subsidiaries.
The Notes will accrue
interest at a rate of 1.00% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2022.
The Notes will mature on December 1, 2026, unless earlier repurchased, redeemed or converted. Before the close of business on the business
day immediately before June 1, 2026, noteholders will have the right to convert their Notes only upon the occurrence of certain events.
From and after June 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second
scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable,
cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The initial
conversion rate is 13.1277 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price
of approximately $76.17 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments
upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change”
(as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of
time.
The Notes will be redeemable,
in whole or in part (subject to certain limitations described below), at the Company’s option at any time, and from time to time,
on or after December 6, 2024 and on or before the 21st scheduled trading day immediately before the maturity date, at a cash redemption
price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption
date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on
(1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the
trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the
date the Company sends such notice. However, the Company may not redeem less than all of the outstanding Notes unless at least $100.0
million aggregate principal amount of Notes are outstanding and not called for redemption as of the time the Company sends the related
redemption notice. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that
Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is
converted during the related redemption conversion period.
If certain corporate
events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited exception for
certain cash mergers, noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal
amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase
date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing
events with respect to the Company’s common stock.
The Notes will have customary
provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following:
(i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to
a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time;
(iii) the Company’s failure to comply with certain covenants in the Indenture relating to the Company’s ability to consolidate
with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially
all of the assets of the Company and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company in its other
obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given
in accordance with the Indenture; (v) certain defaults by the Company or any of its subsidiaries with respect to indebtedness for borrowed
money of at least $50,000,000; and (vi) certain events of bankruptcy, insolvency and reorganization involving the Company or any of its
significant subsidiaries.
If an Event of Default
involving bankruptcy, insolvency or reorganization events with respect to the Company (and not solely with respect to a significant subsidiary
of the Company) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will
immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing,
then, the Trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of Notes then outstanding,
by notice to the Company and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes
then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option,
that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in
the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 270 days at a specified
rate per annum not exceeding 0.50% on the principal amount of the Notes.
Revolving Credit Line
On October 1, 2021, Marathon
Digital Holdings, Inc. (the “Company”) entered into a Revolving Credit and Security Agreement (the “Agreement”)
with Silvergate Bank (the “Bank”) pursuant to which Silvergate has agreed to loan the Company up to $100,000,000 on a revolving
basis pursuant to the terms of the Agreement and the $100,000,000 principal amount revolving credit note issued by the Company in favor
of the Bank under the Agreement (“Note”). The terms of the facility (“RLOC”) set forth in the Agreement and Note
are as follows:
| Initial
Term: |
|
One
(1) Year |
| |
|
|
| Availability: |
|
The
RLOC shall be made available from time to time to the Company for periodic draws (provided no event of default then exists) from
its closing date up to and including the one- year anniversary of the loan date. |
| Origination
Fee: |
|
0.25%
of the Loan Commitment to the Bank (or $250,000); due at RLOC closing. |
| |
|
|
| Unused Commitment Fee: |
|
0.25%
per annum of the portion of the unused Loan Commitment, payable monthly in arrears. |
| |
|
|
| Renewal: |
|
The RLOC may be renewed annually by agreement
between the Bank and the Company, subject to (without limitation): (i) Company makes a request for renewal, in writing, no less than
sixty (60) days prior to the then current maturity date, (ii) no event of default then exists, (iii) Company provides all necessary
documentation to extend the RLOC, (iv) Company has paid all applicable fees related to the loan renewal, and (v) the Bank has approved
such extension request according to its internal credit policies as determined by the Bank in its sole and absolute discretion.
If the Bank approves a request by Company
to renew the RLOC upon any maturity, then a Renewal Fee of 0.25% of the Loan Commitment (or $250,000) shall be due and payable upon
extension of the Loan Commitment. |
| Payments: |
|
Interest only
to be paid monthly, with principal all due at maturity. |
| |
|
|
| Collateral: |
|
The RLOC will be secured
by a pledge of a sufficient amount of Company’s right, title and interest in and to bitcoin and/or U.S. Dollar (“USD”)
stored in a custody account for the benefit of the Bank (the “Collateral Account”). the Bank will establish a Collateral
Account with a regulated custodial entity (the “Custodian”) that has been approved by the Bank. the Bank and Custodian
will have a custodial agreement to perfect the security interest in the pledged Collateral Account which, among other things, allows
for 1) the Bank to monitor the balance of the Collateral Account and 2) allows the Bank to have exclusive control over the Collateral
Account including liquidation of the collateral in the event of Company’s default under the terms of the RLOC. the Bank may
also file a UCC financing statement on the pledged collateral. |
| |
|
|
| Minimum Advance Rate: |
|
At origination, the Company
must ensure the Collateral Account balance has sufficient bitcoin (and/or US$) to cause a Loan to Value (the “LTV”) ratio
of 65% (or less) (“Minimum Advance Rate”) on the unpaid principal balance of the RLOC. |
| |
|
|
| Covenants: |
|
The Company must maintain
a minimum debt to equity ratio of 0.5:1. The Company must maintain a minimum liquidity of $25,000,000. |
On November 9, 2021,
the Company received a waiver letter from Silvergate Bank whereas Silvergate Bank has waived its default rights with respect to noncompliance
of Section VII. Negative Covenants 7.3 Indebtedness and Section VI. Affirmative Covenants 6.5. Financial Covenants. Silvergate Bank accepts
and acknowledges convertible notes in the aggregate principal amount up to $650,000,000, plus an option to purchase an additional $97,500,000
principal amount of Convertible Notes shall not constitute “Indebtedness” for purpose of Section 7.3 of the Revolving Credit
and Security Agreement. Further the maximum debt-to-equity ratio in Section 6.5 shall be revised to be 1.50:1.00.
Note
Payable
On
May 6, 2020, the Company entered into a Paycheck Protection Program Promissory Note agreement with a bank which is providing $62,500
to the Company. The note accrues interest at a rate of 1% per annum and matures on May 6, 2022. The Company applied and received 100%
loan forgiveness in 2021.
Leases
Effective
June 1, 2018, the Company rented its corporate office at 1180 North Town Center Drive, Suite 100, Las Vegas, Nevada 89144, on a month
to month basis. The monthly rent is $1,997. A security deposit of $3,815 has been paid.
The
Company also assumed a lease in connection with the mining operations in Quebec, Canada. Operating leases are included in operating lease
right-of-use assets, operating lease liabilities, and noncurrent operating lease liabilities on the balance sheets. The Company
entered into a termination agreement with the Lessor to agree to terminate the lease as of March 7, 2021. As of that date, the Company
was fully released and discharged from any and all obligations under the Lease Agreement.
Operation
lease costs are recorded on a straight-line basis within operating expenses. The Company’s total lease expense is comprised of
the following:
SCHEDULE
OF COMPONENTS OF LEASE COST
| | |
| | |
| |
| | |
For the Year Ended | |
| | |
December 31, 2021 | | |
December 31, 2020 | |
| Operating leases | |
| | | |
| | |
| Operating lease cost | |
$ | - | | |
$ | 106,727 | |
| Operating lease expense | |
| - | | |
| 106,727 | |
| Short-term lease rent expense | |
| 31,104 | | |
| 26,363 | |
| Total rent expense | |
$ | 31,104 | | |
$ | 133,090 | |
Additional
information regarding the Company’s leasing activities as a lessee is as follow:
SUMMARY
OF MINIMUM LEASE PAYMENTS
| | |
| | |
| |
| | |
For the Year Ended | |
| | |
December 31, 2021 | | |
December 31, 2020 | |
| Operating cash flows from operating leases | |
$ | - | | |
$ | 96,908 | |
| Weighted-average remaining lease term – operating leases | |
| - | | |
| 0.3 | |
| Weighted-average discount rate – operating leases | |
| 0.0 | % | |
| 6.5 | % |
| | |
| | | |
| | |
| 2021 | |
| - | | |
| 126,783 | |
| 2022 | |
| - | | |
| - | |
| Total | |
| - | | |
| 126,783 | |
| Less present value discount | |
| - | | |
| (5,187 | ) |
| Less current portion of operating lease liabilities | |
| - | | |
| (121,596 | ) |
| Non-current operating lease liabilities | |
$ | - | | |
$ | - | |
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Legal
Proceedings
Feinberg
Litigation
On
March 27, 2018, Jeffrey Feinberg, purportedly joined by the Jeffrey L. Feinberg Personal Trust and the Jeffrey L. Feinberg Family Trust,
filed a complaint against the Company and certain of its former officers and directors. The complaint was filed in the Supreme Court
of the State of New York, County of New York. The plaintiffs purported to state claims under Sections 11, 12(a)(2) and 15 of the federal
Securities Act of 1933 and common law claims for “actual fraud and fraudulent concealment,” constructive fraud, and negligent
misrepresentation, seeking unspecified money damages (including punitive damages), as well as costs and attorneys’ fees, and equitable
or injunctive relief. On June 15, 2018, the defendants filed a motion to dismiss all claims asserted in the complaint and, on July 27,
2018, the plaintiffs filed an opposition to that motion. The court heard argument on the motion and, on January 15, 2019, the court granted
the motion to dismiss, allowing 30 days for the filing of an amended complaint. On February 15, 2019, Jeffrey Feinberg, individually
and as trustee of the Jeffrey L. Feinberg Personal Trust, and Terrence K. Ankner, as trustee of the Jeffrey L. Feinberg Family Trust,
filed an amended complaint that purports to state the same claims and seeks the same relief sought in the original complaint. On March
7 and 22, 2019, defendants filed motions to dismiss the amended complaint and on April 5, 2019, plaintiffs filed an opposition to those
motions. The court heard oral argument on the motions to dismiss on July 9, 2019, and at the conclusion of the argument the court took
the motions under submission. On March 13, 2020, the court issued its Decision in which it granted the motions to dismiss in full and
ordered that the case be dismissed with prejudice. On or about May 4, 2020, the plaintiffs filed a notice of appeal. Plaintiffs filed
their opening appellate brief on January 4, 2021, and defendants filed their responsive appellate briefs on February 3, 2021. Oral argument
on the appeal was conducted on April 1, 2021. On April 22, 2021, the court’s Appellate Division issued its Decision and Order affirming
the dismissal of the case.
Ho
Matter
On January 14, 2021, Plaintiff Michael Ho
(“Plaintiff” or “Ho”) filed a Civil Complaint for Damages and Restitution (“Complaint”) against
Marathon Patent Group, Inc., now known as Marathon Digital Holdings, Inc. (the “Company”) in the Superior Court of the
State of California for the County of Riverside. The Complaint alleges six causes of action against the Company, (1) Breach of
Written Contract; (2) Breach of Implied Contract; (3) Quasi-Contract; (4) Services Rendered; (5) Intentional Interference with
Prospective Economic Relations; and (6) Negligent Interference with Prospective Economic Relations. The Complaint seeks
damages, restitution, punitive damages, and costs of suit. The claims arise from the same set of facts. Ho alleges that the Company
profited from commercially-sensitive information he shared with the Company, purportedly under a mutual non-disclosure agreement,
and that the Company failed to compensate him for his role in securing the acquisition of a supplier of energy for the Company. On
February 22, 2021, the Company responded to Mr. Ho’s Complaint with a general denial and the assertion of applicable
affirmative defenses. Then, on February 25, 2021, the Company removed the action to the United States District Court in the Central
District of California, where the action remains pending. Marathon filed a motion for summary judgment/adjudication of all causes of
action. On February 11, 2022, the Court granted the motion and dismissed Ho’s 2nd, 5th and
6th causes of action. Discovery is closed. The Court held a pre-trial conference on February 24, 2022, where
it vacated the March 3, 2022 trial date and ordered the parties to meet and confer on a new trial date, which will likely be after
June 2022, given the Court’s current backlog as a result of Covid. The Court discussed the various theories of damages
maintained by the parties. In its ruling on the summary judgment motion and at the pre-trial conference on February 24, 2022,
the Court noted that a jury is more likely to accept $150,000
as an appropriate damages amount if liability is found, as opposed to the various theories espoused by Ho that result in
multi-million dollar recoveries. Due to outstanding issues of fact and law, it is impossible to predict the outcome at this
time; however, after consulting legal counsel, the Company is confident that it will prevail in this litigation, since it did not
have a contract with Mr. Ho and he did not disclose any commercially-sensitive information under any mutual nondisclosure agreement
that was used to structure any joint venture with energy providers. Trial is set to begin on May 26, 2022.
Information
Subpoena
On
October 6, 2020, the Company entered into a series of agreements with multiple parties to design and build a data center for up to 100-megawatts
in Hardin, MT. In conjunction therewith, the Company filed a Current Report on Form 8-K on October 13, 2020. The 8-K discloses that,
pursuant to a Data Facility Services Agreement, the Company issued 6,000,000 shares of restricted Common Stock, in transactions exempt
from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. During the quarter ended September 30, 2021, the Company
and certain of its executives received a subpoena to produce documents and communications concerning the Hardin, Montana data center
facility described in our Form 8-K dated October 13, 2020. We understand that the SEC may be investigating whether or not there may have
been any violations of the federal securities law. We are cooperating with the SEC.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
6 - INCOME TAXES
The
Company accounts for income taxes under ASC Topic 740: Income Taxes, which requires the recognition of deferred tax assets and liabilities
for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax losses and tax credit carry-forwards. ASC Topic 740 additionally requires the establishment
of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
Income
tax expense attributable to income from continuing operations was $23,020,721 and
$2,400 for
the years ended December 31, 2021 and 2020, respectively, and differed from the amounts computed by applying the U.S. federal income
tax rate of 21%
to pretax income from continuing operations as a result of the following:
SCHEDULE
OF PRETAX INCOME FROM CONTINUING OPERATIONS
| | |
2021 | | |
2020 | |
| | |
| | |
| | |
| | |
| |
| Federal income tax expense (benefit) at the statutory rate | |
| (21.0 | )% | |
$ | (2,762,295 | ) | |
| (21.0 | )% | |
$ | (2,229,606 | ) |
| State income taxes, net of federal tax expense | |
| 57.7 | % | |
| 7,593,773 | | |
| (7.0 | )% | |
| (745,190 | ) |
| Executive Compensation Deduction Limitation | |
| 229.7 | % | |
| 30,213,175 | | |
| 4.2 | % | |
| 444,031 | |
| Excess Tax Benefit Related to Share-Based Compensation | |
| (14.5 | )% | |
| (1,909,197 | ) | |
| 0.0 | % | |
| - | |
| Nondeductible Other Expenses | |
| 1.7 | % | |
| 225,278 | | |
| 0.0 | % | |
| - | |
| Change in Valuation Allowance | |
| (110.1 | )% | |
| (14,477,083 | ) | |
| 23.9 | % | |
| 2,533,165 | |
| Change in Expected Utilization of Tax Attributes | |
| 32.5 | % | |
| 4,281,445 | | |
| 0.0 | % | |
| - | |
| Other, net | |
| (1.1 | )% | |
| (144,375 | ) | |
| 0.0 | % | |
| - | |
| Income tax expense (benefit) from continuing operations | |
| 174.9 | % | |
$ | 23,020,721 | | |
| 0.1 | % | |
$ | 2,400 | |
The
components of the provision for income taxes are as follows:
SCHEDULE
OF PROVISION FOR INCOME TAXES
| | |
2021 | | |
2020 | |
| Current income tax expense (benefit) | |
|
| | |
| | |
| Federal | |
|
- | | |
| | |
| State | |
$ |
1,600 | | |
$ | 2,400 | |
| Total Current Income Tax Expense | |
|
1,600 | | |
| 2,400 | |
| | |
|
| | |
| | |
| Deferred expense | |
|
| | |
| | |
| Federal | |
|
29,904,031 | | |
| - | |
| State | |
|
7,592,173 | | |
| - | |
| Total Deferred Tax Expense | |
|
37,496,204 | | |
| 9,079,841 | |
| | |
|
| | |
| | |
| Change in Valuation Allowance | |
|
(14,477,083 | ) | |
| (9,079,841 | ) |
| | |
|
| | |
| | |
| Net Deferred Tax Expense after Valuation Allowance | |
|
23,019,121 | | |
| (0 | ) |
| | |
|
| | |
| | |
| Income Tax Provision | |
$ |
23,020,721 | | |
$ | 2,400 | |
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2021 and 2020 are presented below.
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| | |
12/31/2021 | | |
12/31/2020 | |
| Deferred tax assets: | |
|
| | |
| | |
| Tax Credit carryforwards | |
$ |
163,211 | | |
$ | 31,961 | |
| Net Operating Loss carryforwards | |
|
25,422,829 | | |
| 11,467,248 | |
| Capital Loss carryforwards | |
|
- | | |
| 758,731 | |
| Intangible assets | |
|
1,055,099 | | |
| 2,995,317 | |
| Stock Compensation | |
|
447,487 | | |
| 246,975 | |
| Accruals, reserves and other | |
|
269,096 | | |
| 143,079 | |
| Digital Currencies | |
|
7,255,674 | | |
| - | |
| Other | |
|
- | | |
| 144,358 | |
| Total gross deferred tax assets | |
|
34,613,396 | | |
| 15,787,669 | |
| | |
|
| | |
| | |
| Less Valuation Allowance | |
|
- | | |
| (14,477,083 | ) |
| | |
|
| | |
| | |
| Net deferred tax assets | |
|
34,613,396 | | |
| 1,310,586 | |
| | |
|
| | |
| | |
| Deferred tax liabilities: | |
|
| | |
| | |
| | |
|
- | | |
| - | |
| Unrealized Gains | |
|
(18,294,723 | ) | |
| - | |
| Prepaid service contracts | |
|
(4,395,095 | ) | |
| | |
| Property and equipment | |
|
(34,942,699 | ) | |
| (1,310,586 | ) |
| Total gross deferred liabilities | |
|
(57,632,517 | ) | |
| (1,310,586 | ) |
| Net deferred tax liability | |
$ |
(23,019,121 | ) | |
$ | - | |
The
valuation allowance for deferred tax assets as of December 31, 2021 and 2020 was $0 and
$14,477,083,
respectively. The net change in the total valuation allowance was a decrease of $14,477,083 in
2021.
At
year ended December 31, 2021, the Company concluded, based upon all available evidence, it was more likely than not that it would have
sufficient future taxable income to realize the Company’s federal and state deferred tax assets. As a result, the Company released
$14.5 million of
valuation allowance associated with deferred tax assets and recognized a corresponding benefit from income taxes in the consolidated
statement of operations for the year ended December 31, 2021. The Company’s conclusion regarding the realizability of such deferred
tax assets was based on the scheduled reversal of existing deferred tax liabilities.
At
December 31, 2021, the Company has net operating loss carryforwards for federal income tax purposes of $109,130,270,
which are available to offset future taxable income. The Company has net operating loss carryforwards for state income tax purposes
of $54,106,348 which
are available to offset future state taxable income.
SCHEDULE
OF NET OPERATING LOSS CARRYFORWARDS
| | |
Gross Amount | | |
Expiring |
| | |
| | |
|
| Federal Net Operating Loss Carryforwards | |
| 3,314,298 | | |
2034-2035 |
| Federal Net Operating Loss Carryforwards - Indefinite Life | |
| 105,815,972 | | |
Indefinite |
| State Net Operating Loss carryforwards | |
| 54,106,348 | | |
2035-2041 |
Section
382 and Section 383 of the Internal Revenue Code limit the utilization of U.S. tax attribute carryforwards following a change of
control. Based on the Company’s analysis under Section 382, approximately $76.2 million of tax attributes is limited by Section 382/383 as of December 31, 2021. The Section 382/383 limitation in conjunction with the twenty-year
carryforward limitation caused $37.8 million of attributes to be deemed worthless, which resulted in a write-off of the
deferred asset.
In
addition, the Company has the following attributes and credit carryforwards as follows:
SCHEDULE
OF ATTRIBUTES AND CREDIT CARRYFORWARDS
| Federal R&D Tax Credit Carryforwards | |
| 131,250 | | |
2040-2041 |
| State alternative minimum tax credit carryforwards | |
| 40,457 | | |
|
A
reconciliation of the beginning and ending amount of total unrecognized tax benefits for the tax years ended December 31, 2021, and 2020
is as follows:
SCHEDULE
OF UNRECOGNIZED TAX BENEFITS ROLL FORWARD
| | |
2021 | | |
2020 | |
| | |
| | |
| |
| Balance, beginning of year | |
$ | - | | |
$ | - | |
| Increase related to prior year tax positions | |
| 25,000 | | |
| - | |
| Decrease related to prior year tax positions | |
| - | | |
| - | |
| Increase related to current year tax positions | |
| 18,750 | | |
| - | |
| Settlements | |
| - | | |
| - | |
| Lapse of statute of limitation | |
| - | | |
| - | |
| Change in tax rate | |
| - | | |
| - | |
| | |
| | | |
| | |
| Balance, end of year | |
$ | 43,750 | | |
$ | - | |
Unrecognized
tax benefits that reduce a net operating loss, similar tax loss or tax credits carryforward are presented as a reduction to deferred
income taxes.
The
company has established a reserve against its federal R&D tax credits generated in 2021.
As of December 31, 2021, the total amount of unrecognized
tax benefits was $43,750, all of which was offset against deferred tax assets. If the unrecognized tax benefits were recognized as of
December 31, 2021, there would be a $43,750 favorable impact that would affect the effective rate on income from continuing operations.
The Company also accrues for interest and penalties on its uncertain tax positions and includes such charges in its income tax provision
in the Consolidated Statement of Operations. Interest and penalty expense amounted to nil and nil, respectively, in 2021. Total accrued
interest and penalties were nil and nil, respectively, in 2021. The Company does not currently expect any of its remaining unrecognized
tax benefits to be recognized in the next twelve months.
The Company files federal and state income tax
returns. The 2018-2020 tax years generally remain subject to examination by the IRS and various state taxing authorities, although the
Company is not currently under examination in any jurisdiction.
MARATHON
DIGITAL HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
In
2018, the company dissolved those subsidiaries that were required to file tax returns that had no tax due for 2018. Marathon Digital
Holdings, Inc. moved its headquarters to Las Vegas, Nevada on June 1, 2018 so it is required to file a final tax return with the state
of California for 2018. The company believes there will be no tax due in the state of California other than the $800
Minimum Franchise fee that all companies
are required to pay.
Management
does not believe there are any material tax liabilities owed with respect to its operations in Canada, since Management believes there
is a loss from the Canadian operations. Such operations have been outsourced. (See NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS,
for details)
The
Coronavirus Aid, Relief, and Economic Security (CARES) Act, was enacted March 27, 2020. Among the business provisions, the CARES Act
provided for various payroll tax incentives, changes to net operating loss carryback and carryforward rules, business interest expense
limitation increases, and bonus depreciation on qualified improvement property. Additionally, the Consolidated Appropriations Act of
2021 was signed on December 27, 2020 which provided additional COVID relief provisions for businesses. The Company has evaluated the
impact of both the Acts and has determined that any impact is not material to its financial statements.
NOTE
7 – Subsequent Events
On
February 11,
2022, we entered into an At The Market Offering
Agreement, or sales agreement, with H.C. Wainwright & Co., LLC, or Wainwright, relating to shares of our common stock offered by
this prospectus supplement. In accordance with the terms of the sales agreement, we may offer and sell shares of our common stock having
an aggregate offering price of up to $750,000,000 from time to time through Wainwright acting as our sales agent.
As of December 31, 2021, the market price of
bitcoin was approximately $46,306
per Yahoo Finance. Subsequent to year end, the price of bitcoin decreased to approximately $35,030
on January 22, 2022. Pursuant to ASC 350, the Company anticipates recording an impairment charge on its mined bitcoin of
approximately $21
million for the decrease in the market price of bitcoin during January 2022.
The
Company has evaluated subsequent events through the date of the consolidated financial statements were available to be issued and has
concluded that no such events or transactions took place that would require disclosure herein except as stated directly above.